Current Price – $5.13
Expected Buyout – $6.5
Upside – 25%
Expiration Date – TBD
This is a fairly straightforward situation. Tangoe received non-binding proposals to be acquired by Marlin Equity Partners (10% shareholder) at $7.5/share and by Clearlake Capital Group and Vector Capital Management (jointly 25% shareholders) at $7/share. Following further discussions Marlin later reduced their proposal to $6.5/share. Clearlake/Vector have not issued any further updates with regards to their offer so it is not clear whether their proposal still stands.
All of the indicated shareholders accumulated their stakes during 2016 at $7+ per share.
Despite these acquisition proposals, the shares of the company continued to trade down as business is facing a number of issues:
- Financials are not current. The latest published accounts are from Q3 2015;
- Previously filed financials for 2013-2015 will be restated;
- Previously profitable operations appeared to be actually loss making after restatements. Growth slowed down significantly in 2015 (2016 still unknown);
- Class action lawsuit has been filed against the company;
- And apparently SEC is investigating Tangoe.
However, in the latest correspondence (1st of March 2017) Marlin indicated that they are fully aware of all these issues and seem to be ok with them:
"We have completed a significant amount of due diligence to-date, including (i) on-site discussions with management; (ii) work with Stifel and management to fulfill diligence requests and numerous conference calls; (iii) reviewed and held a follow-up call on Alvarez & Marsal’s quality of earnings report; and (iv) commissioned a third-party market study on the telecom expense management (“TEM”) industry to better understand Tangoe’s current and future market positioning and opportunity. Based on this extensive due diligence we’ve conducted, our deep experience in the software industry and our public-to-private expertise, we are excited about the Business and interested in working with the board of directors to ensure an expeditious and seamless Transaction."
"This indication of interest contemplates the liabilities associated with the pending class action lawsuit as described herein, as well as the ongoing SEC investigation, resulting fines and other litigation based on the information provided to Marlin by Tangoe. In addition, we confirm that neither the potential delisting of Tangoe’s shares from the NASDAQ exchange nor the availability of audited financials for Tangoe will affect the terms outlined in this indication of interest."
In addition it seems that Marlin also had access to the latest financials as updated financials are not among their further due-diligence requests. Following this latest communication by Marlin, stock was trading around $6/share.
However, last week company got delisted from NASDAQ (this was expected to happen) causing the shares to fall down to $4.5 - potentially due to forced selling by investors who are not allowed to hold OTC stocks or due to over-reaction by the market to this non-event. Shares have rebounded from the lows over the last two days, but I believe that current levels still provide good entry point - besides technical factor behind delisting there seems to be no reason for the stock to trade below the levels where it traded in the beginning of March. Thus, I am expecting a relatively fast rebound to $6/share, which is my key expectation from this trade.
To be fair I have very limited understanding about Tangoe business (enterprise software for IT and Telecom expense management) to fully assess the value of the company (especially with no current financials and loss making operations), but bids by two equity groups provide confidence for holding this stock at least for the short term.
The key risks here is that interested parties might fully withdraw their non-binding proposals (Marlin's offer was already lowered once), 2016 operations might further disappoint the market when financials are released (Marlin seems to know the numbers and is ok with them) and also there might be negative outcomes from class action lawsuit and SEC investigation (again Marlin seems to be ok with both).